Non-excludability

Another important characteristic of knowledge is the inability to exclude others from using it, though the degree of excludability will vary according to a number of factors.

Another characteristic often attributed to knowledge is non-excludability. In its purest form, non-excludability means that once a good has been created, it is impossible to prevent other people from gaining access to it (or more realistically, is extremely costly to do so).

While non-rivalry is an inherent feature of knowledge, it makes sense to think of non-excludability as more of a continuum, with the degree of excludability varying depending on a range of factors. These include:

the observability of the knowledge (for example, the process for manufacturing a product may be more excludable than the design);

the legal and regulatory environment;

the state of technology; and

the characteristics of both imitators and knowledge creators.

It is important to note that theorists in the economics of knowledge do not assume that all knowledge is non-excludable, and this assumption is not necessary for knowledge to create problems for a free-market outcome. For example, Jones (2002, adapting Romer, 1993), gives some examples of non-rivalrous knowledge goods that are at the “non-excludable” end of the spectrum – eg, basic R&D, calculus – and those that are at the “excludable” end – eg, encoded satellite TV transmission. Similarly, Romer’s model actually assumes that ideas are fully excludable in the “application of ideas or blueprints to the production of goods” – but not excludable in the research process. For example, a researcher can acquire patent protection for the design of a new drug, but cannot protect against other researchers using the ideas to develop a new and improved drug design (see Dowrick 2002, p9).

If knowledge is not perfectly excludable, others can benefit from the knowledge other than the creator. The knowledge “spills over” to others – a positive externality. This outcome is good from a social point of view, because the benefit to society as a whole outweighs the loss of potential economic rents the creator could have made from keeping the knowledge to herself (because knowledge is non-rival). However, the creator’s ex post inability to capture the full benefits of new knowledge will diminish the incentive to invest in developing knowledge in the first place.

Neither perfect excludability nor perfect non-excludability is likely to result in the socially optimal outcome.

The right to exclude would give owners of the intellectual property (IP) the ability to charge prices to cover and probably exceed their average costs. But economic efficiency demands prices equal marginal costs. Since the marginal cost of using a piece of knowledge more than once is zero, such prices would then not cover average costs. Thus there is a fundamental tension between incentives to create knowledge and incentives to disseminate it. It is similar to the problem of using competitive market prices to incentivise the efficient production and consumption of public goods and of any “natural monopoly” good whose production is characterised by decreasing average costs. In each case there is no practical ideal way to incentivise both production and consumption at the same time.

An important upshot of the above discussion is that while excludability solves one of the problems of knowledge (giving creators of new ideas an incentive) it generates another one by restricting the dissemination of knowledge. Consequently, neither perfect excludability nor perfect non-excludability is likely to result in the socially optimal outcome.

In the New Zealand context, this policy discussion should also consider that the majority of world knowledge is created abroad. For example, strengthening excludability in New Zealand (eg, through IP rights) could increase incentives for New Zealand firms to innovate, but could also make it more difficult for New Zealand firms to make use of innovations developed overseas.